11 7 questions 1 the time it will take to recoup in the form of cash inflows the ini 4307922

11 7 questions 1 the time it will take to recoup in the form of cash inflows the ini 4307922

11.7   Questions

1) The time it will take to recoup in the form of cash inflows the initial dollars invested in an investment project is called the ________.

A) recovery period

B) accounting rate of return

C) internal return period

D) payback period

2) Which of the following statements about the payback model is FALSE?

A) The payback model measures how quickly investment dollars may be recouped.

B) The payback model provides a rough estimate of the riskiness of a project.

C) The payback model does not consider cash flows after the payback period.

D) The payback model measures profitability.

3) An investment of $42,000 is expected to generate the following annual cash flows:

Year 1$10,000

Year 2$15,000

Year 3$15,000

Year 4$12,000

Assume straight-line depreciation is used.  Ignore income taxes.  What is the payback period?

A) 3 years

B) 3.17 years

C) 3.83 years

D) 4 years

4) An investment of $180,000 is expected to generate $100,000 in cost savings annually for three years.  Assume straight-line depreciation is used.  Ignore income taxes.  What is the payback period?

A) 0.80 years

B) 1.80 years

C) 1.88 years

D) 3.00 years

5) An investment of $270,000 is expected to generate $140,000 in cost savings annually over the asset's three year life.  Assume straight-line depreciation is used.  Ignore income taxes.  What is the payback period?

A) 0.75 years

B) 1.93 years

C) 2.40 years

D) 3.00 years

6) An asset of $180,000 is expected to generate $90,000 in operating income annually for three years.  Assume straight-line depreciation is used.  The asset has no expected residual value.  Ignore income taxes.  The accounting rate of return based on the initial investment is ________.

A) 8.33%

B) 16.67%

C) 33.33%

D) 41.67%

7) An asset of $270,000 is expected to generate $180,000 in operating income annually for three years.  Assume straight-line depreciation is used. The asset has no expected residual value.  Ignore income taxes.  The accounting rate of return based on the initial investment is ________.

A) 11.11%

B) 33.33%

C) 44.44%

D) 50.00%

8) ________ is a capital budgeting model that ignores the time value of money and focuses on the profitability of an investment project.

A) Payback model

B) Internal rate of return model

C) Accounting rate of return model

D) Real options model

9) A disadvantage of the accounting rate of return model is ________.

A) it has profitability of the project as an objective

B) it is consistent with accrual accounting

C) it is based on the familiar financial statements

D) it ignores the time value of money

10) The payback model measures profitability as well as how quickly investment dollars are recouped.

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